November 11, 2006

Fun with Carbon Taxes

Mark Kleiman argues that we need a carbon tax to avert global warming and give people incentives to adopt less energy-intensive lifestyles. But because new taxes are such a radioactive thing to propose, and because a gas tax would be fairly regressive, Kleiman says Congress should push to replace Social Security taxes with carbon taxes. "Kill two birds with one stone." Back when Al Gore proposed the same thing, Nick Beaudrot did a rough estimate about what this would entail:

The US produced roughly 6 million metric tons of CO2 last year. Social Insurance taxes brought in $733 Billion in revenue. A gallon of gas produces 20 pounds of CO2. The math says ... $.06 per pound of CO2, or $1.20 per gallon of gas. Pre-2004, gas was about $4.50/gal US in Europe, and below $2.00/gal in most of the States.

Most workers would see a $5,000 per year raise alongside all that. That sounds reasonable, and it probably would be a decent sell politically, although note that Nick's only making calculations for the first year. If the carbon tax works as it should, then, at some point in the future, it will cause a reduction in emissions, which means, at some point in the future, revenue from the carbon tax would start shrinking—and that could put Social Security and Medicare on a rickety footing. So I'd like to see a long-run estimate done.

Plus, as a general rule, it seems sloppy to connect two totally unrelated policies in this way. Assume we need to raise carbon taxes by X amount to stave off global warming. There's no reason whatsoever why X will also be the exact same amount needed to finance Social Security. So the government could end up either raising too much money for one purpose or too little for the other if it wants to stay "revenue neutral." Why not instead just combine a carbon tax with a refundable tax credit and leave Social Security alone. The effect could be roughly the same, no?

Solvency aside, I'd also be worried about severing the connection between payroll taxes and Social Security—as we saw two years ago, the current "pay as you go" financing structure makes the program extremely hard to hack up or mess with, since it helps foster the idea that Social Security is a universal social insurance program, paid for more or less equally by all. Not so with a carbon tax. It wouldn't take long for conservatives to point out that the retirement funds for latte-sipping MUNI-riders in San Francisco are being paid by pickup-truck drivers in the "heartland." They'd sort of be right. Anyway, I'm not saying Gore's idea is terrible, I'm just pointing out some issues.

Update: Hmm... Gar Lipow points out that, in any case, a carbon tax won't necessarily lead to dramatic carbon emissions, because that's something that will take "fundamental infrastructure changes," which need to be directed by the government, rather than price signals. "Carbon taxes will have their place," he says, "after infrastructure is in place, and people have real alternatives available." Along those lines, I should note, Nancy Pelosi has promised that one of Congress' first acts will be to cut oil subsidies and spend the money on alternative energy research and production.